econ class 1

8/8/2019 Econ Class 1

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THE UNIVERSITY OF BRITISH COLUMBIA

Managerial EconomicsComm 295 and FRE 295

Class 1

1. Course Outline

2. Introduction

3. Supply and Demand


1. Outline

Instructor: James Brander

Time: Tues-Thurs: 3:30 5:00 pm(start on time and finish on time -- by 4:50).

Office Hours: After class and Wed: 1:30 3:00

Phone Number: 604.822.8483

The best way to contact me is using e-mail through Vista.


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Outline contd

Vista: Class notes, other course content, e-mail, discussiongroups. A detailed course outline is currently posted.From now on, class notes will be posted before class.

Course Description: Economic foundations of managerialdecisionmaking. Some topics were introduced inPrinciples of Economics and will be extended to moreadvanced applications here. Some topics will be new.

Textbook: Managerial Economics, Second Custom Edition,University of British Columbia. Last years book, the firstcustom edition, will NOT be sufficient.


Outline contd

Clickers: All students will need a clicker. Please makesure you have an operational clicker by next class.

Evaluation:

Two Assignments 5% each

Midterm on October 27 (evening) 35%

Class Participation 5%

Final Exam 50%

Total 100%


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2. Introduction: DefiningEconomics

1. Analysis of the allocation of scarce resources, or

2. Study of the economy consumption (demand), production

(supply), investment, employment, finance, etc .

Managerial economics consists mostly of microeconomic topics,especially topics related to decision-making within firms.

Macroeconomics focuses economy-wide aggregates likeunemployment, inflation, aggregate economic growth, interest rates.

Microeconomics focuses on individual economic units: consumers,firms, workers and investors and the markets in which they interact.


Introduction contdWhy Study Managerial Economics

Objectives: 1) Learn to think like an economist

2) Learn to improve managerial decision-making

Thinking like an economist requires

i) a focus on economic incentives

ii) marginal reasoning

iii) familiarity with major models of economicbehaviour including the supply and demand model

iv) analytical tools such as diagrams, algebra, and calculus.


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Clicker Question 2

The prices of grains such as rice and wheat have risen sharply in

recent months, causing significant problems in a number of

countries. Some of this countries have responded by imposing

price controls on grain prices. A likely effect of such price

controls in those countries is:

a) Shortages of grain.

b) Increased time spent in line to buy grain

c) A decline in local grain production.

d) Increased hoarding of grain

e) All of the above.

(Use a diagram to illustrate the effect.)


Clicker Question 3

According to the basic model of supply and demand, a carbon tax of $.50

per litre on gasoline would be likely to

a)Cause the consumer price of gasoline to rise by more than $0.50.

b)Cause the consumer price of gasoline to rise by less than $0.50.

c)Cause the consumer price of gasoline to rise by exactly $0.50

d)Cause consumption of gasoline to rise.

e)Impossible to say based on the information given.


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Clicker Question 4

A demand function is given by QD = 104 40p + 20pt + 0.01Y and a

supply function is given by QS = 58 + 15p 20pf

where Q = quantity, p = price, pt is the price of another good, pf is

the price of an input, and Y is income.

What is the equilibrium price, p, if pt = $0.80, pf= $0.40 and Y =

$4000?

a) $1.50

b) $1.75

c) $2.00d) $2.35

e) none of the above


Clicker Questions

One question relates to the effect of a carbon tax on activities that

use gasoline? How much of a price increase can we expect?

This question is one of many that can be addressed using the

supply-demand model.


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The Demand Curve

The amount of a good that consumers are willing to buy at a given

price, holding other factors constant, is the quantity demanded.

A demand curve shows the quantity demanded at each possibleprice, holding constant the other factors that influence purchases.

For example, the demand curve for avocados shows the quantity of

avocados that would be purchased at each price.


A Demand Curve for Avocados


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Finding the Quantity Demanded ata Given Price

The demand curve hits the vertical axis at $4, indicating that no

quantity is demanded when the price is $4 per lb.

The demand curve hits the horizontal quantity axis at 160 million

lbs, the quantity demanded if price is zero.

To find the quantity demanded at a price between 0 and $4, pick

that price on the vertical axissay, $2draw a horizontal line to

the demand curve, then draw a vertical line to the quantity axis.

As the figure shows, the quantity demanded at a price of $2 per lbis 80 million lbs per month.


The Law of Demand: Demandcurves slope downwards.

The Law of Demand states that quantity demanded rises when

price falls: Demand curve slopes downward. This is an empirical

statement. It does not have to be true on purely logical grounds,

but it is usually true in real cases.

A change in a goods own price causes a movement along the

demand curve.


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Shifts in Demand

1. Changes in income

2. Changes in prices of related goods (substitutes or complements)

Substitutes are goods that can replace each other

Complements are goods that go together

3. Changes in information

4. Changing consumer tastes

5. Other factors

What will cause a demand curve to shift position?


The Demand Curve Shifts Out if aSubstitutes Price Rises

Figure 2.2 A Shift of the Demand Curve. The demand curve for avocados

shifts to the right fromD1 toD2 as the price of tomatoes, a substitute, increases

by 55 per pound. More avocados are demanded at any given price.


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The Demand Function

The demand curve shows the relationship between the quantity

demanded and a goods price, holding other factors constant.

The demand function shows the effect ofall relevant factors on the

quantity demanded. If the factors that affect the amount of avocados

demanded include the price of avocados, the price of tomatoes, and

income, the demand function can be written as

Q = D(p,pt, Y)

The demand function for avocados per month is

Q = 104 40p + 20pt+ .01Y.


Obtaining a Demand Curve from aDemand Function

For demand curveD1 we holdpt= $0.80, and Y = $4,000 per month.

Substituting these values in the demand function yields

QD = 160 40p.

This is the equation of the demand curve with particular values for

the price of tomatoes and for income.


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The Supply Curve

A supply curve shows the quantity supplied at each possible price,

holding constant the other factors that influence supply decisions.

The supply curve shown is given by QS = 50 + 15p


Supply Curve Shifts

What might shift the supply curve?

Changes in the cost of inputs

Changes in technology

Weather, natural disasters, etc.


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Market Equilibrium: Supply = Demand

Market equilibrium occurs when the quantity supplied equals the

quantity demanded. Diagrammatically, this is where the supply curve

and the demand curve intersect.


What happens at other prices?

What happens if the price is above the equilibrium price?

What happens if the price is below the equilibrium price?

The market mechanism moves price toward the equilibrium (market-

clearing) level.

The theory of supply and demand predicts that prices (in free

competitive markets) will equate supply and demand. In otherwords, the theory predicts that the price in a market will occur at

the intersection of the supply and demand curves.


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Excess Supply and ExcessDemand

At a price of $2.40 there is excess supply. At $1.60 there is

excess demand. At the equilibrium price of $2.00 the market

clears


Solving supply and demandequations for equilibrium

QD = 160 40P

QS = 50 + 15P

The supply and demand curves can be represented using algebra.

QD = QS , or 160 40P = 50 + 15P

In equilibrium, quantity demanded must equal quantity supplied:

We add 40P to both sides and subtract 50 from both sides to obtain

110 = 55P or P = 2.

We then put this value for P into either the demand curve or the supply

curve to obtain Q = 80.


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Summary

1. Outline

2. Definitions of economics and managerial economics

3. Why Study Managerial Economics

4. The Theory of Supply and Demand

The Demand Curve

The Supply Curve

Equilibrium

Demand and Supply ShiftsNEXT CLASS: Read Ch. 2 in text and Section 3.1 of Ch. 3

Clicker questions at beginning of class on supply and demand

econ class 1

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